CFTC’s DSIO issues advisory providing guidance to FCMs holding virtual currencies for customers - 29 October 2020

The CFTC’s Division of Swap Dealer and Intermediary Oversight issued an advisory letter which provides guidance to market participants on how the agency’s requirements apply to digital currencies deposited by customers.

The CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) issued an advisory to letter to FCMs regarding the holding of virtual currency in segregated accounts. The advisory provides guidance to FCMs on how to hold and report certain deposited virtual currency from customers in connection with physically delivered futures. In an accompanying press release DSIO Director Joshua B. Sterling stated that, "At the CFTC, one of our core values is to provide clarity to market participants." He also noted that the advisory will further these goals and provide additional certainty on these issues (CFTC Letter 20-34, October 21, 2020).

FCMs looking for answers. In its introduction, the advisory states that the DSIO is providing FCMs with its view regarding accepting and holding customer virtual currency assets and guidance on practices to consider in developing and maintaining their risk management programs when holding virtual currency as customer funds. According to the letter, this guidance has come in response to queries from market participants on this topic.

A dozen reminders. The DSIO’s guidance is broken down into 12 points that FCMs are reminded to adhere to when holding virtual currency as customer funds. These items are summarized as follows:


Virtual currency held as customer funds by an FCM must be deposited only with a bank, trust company, or another FCM, or with a clearing organization that clears virtual currency futures, options on futures, or cleared swap contracts (a "Depository").


An FCM must deposit virtual currency held as customer funds with a Depository under an account name that clearly identifies the funds as customer funds and shows that the funds are segregated as required by the CEA and Commission regulations.


Virtual currency must be available for withdrawal from a Depository upon the demand of an FCM, so that deliver according to the terms of the contracts to which the virtual currency relates will be made without delay.


An FCM in preparing its daily and month-end segregation statements must report a customer’s virtual currencies at fair market value. The fair market value of the virtual currencies must reflect the FCM’s reasoned judgment based on spot market or other appropriate market transactions.


An FCM may not offset a debit or deficit in a futures customer’s or cleared swaps customer’s account by the value of any virtual currency held in the respective customer’s account. Therefore, an FCM may be required to deposit its own funds into segregation to cover any debit or deficit.


An FCM may not deposit its own virtual currencies in futures customer or cleared swaps customer segregated accounts for any reason, including in order to meet targeted or residual interest requirements.


An FCM may not invest any segregated futures customer or segregated cleared swap customer funds in virtual currency to be held on behalf of customers.


An FCM should limit the acceptance of virtual currency into segregated and cleared swaps segregated accounts when the particular type of virtual currency relates solely to customer trading, and the amount of virtual currency accepted reasonably relates to the customer’s level of trading in those contracts during each calendar quarter as determined by the FCM.


All virtual currency accepted by an FCM should not provide margin value to any contracts other than the contracts related to the virtual currency being traded, provided certain customer defaults would be recoverable by the FCM.


An FCM that holds virtual currency for a customer should contact the customer and initiate a return of that virtual currency if the customer has ceased trading the contracts to which the virtual currency relates and, thus, there is no related open futures position.


Each withdrawal of virtual currency from a Depository upon demand by the FCM in order to liquidate customer accounts or return customer funds should be completed within a time that is technologically and operationally possible.


Before accepting any virtual currency into segregation, an FCM should provide 45 days prior written notice to all futures and cleared swaps customers that the FCM will begin accepting virtual currency as of a specified date.

Some final words of caution. Towards the advisory letter’s conclusion, it provides that the DSIO may determine to examine any FCM that accepts and holds customer virtual currency assets to determine how it is choosing to meet its obligations. The letter also warns, "This guidance in no way limits the ability of the Division to refer an FCM to the Division of Enforcement for potential investigation relating to the FCM’s practices involving virtual currencies, specific transactions involving virtual currencies or related contracts, or for any other reason." Caveat FCM!.

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